Another economic domino falls - Bear Stearns

Great Debates
41

[QUOTE=Renob]
A little personal responsibility would have solved this, too. We bought a house two years ago. We could have easily chosen an ARM. We educated ourselves on the pros and cons and decided on a fixed-rate mortgage. People who took ARMs (and the companies that pushed them agressively) are paying for their mistakes. Unfortunately, some in government want to bail them out. I say let the market work as it is supposed to work – punish those who made bad choices. That is the best regulation. It still preserves the option for those who use ARMs wisely (we’ve had friends who took ARMs and had no problems) while disciplining those who do not. Using heavy-handed regulation that treats everyone the same is a massive overreaction.

[/QUOTE]

I don’t understand this. Everyone is responsible for our current state. The obligation to be personally responsible falls not only on the end borrower but on every individual up the chain.

The borrower had a responsibility not to lie on his application and not to take out a retarded loan.

The bank had a responsibility to do real due diligence for loans it was originating.

The rating agencies had a responsibility to assess the adequacy of this due diligence when it reviewed the securitized & repackaged debts.

The same banks who bought the instruments had a responsibility to understand exactly what it is they were buying and reserve accordingly.

The problem with this scenario is that there was tremendous alignment of incentives. Everyone was making money on these transactions, so there was no incentive for anyone to dig any deeper or to deviate from trust from the other parties. No one assumed the necessarily responsibility to dig a little deeper because on the surface, no one was thought he was getting screwed. Homeowners were generating gobs of cash, institutions were delivering massive ROIs, and everyone was happy.

But in the end, banks were dropping turds in their own punchbowls because they didn’t think they would be drinking any at the party. They were wrong. Now the whole financial system tastes like shit, and it’s pretty much everyone’s fault.

42

[QUOTE=xtisme]
I thought the domino theory was pretty much tossed out decades ago…
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Dominos (and tipping points) are useful metaphors for anyone who wants to dramaticize some problem or issue. Doomsayers love positive feedback loops, because they lets them predict huge consequences. Ironically, optimists such as Ray Kurzweil love positive feedback loops too.

43

Maeglin, you have a positive GIFT for metaphor!

44

[QUOTE=Shayna]
What I paid for my house is really none of your business. Our income is well into 6 figures annually. We have no debt other than the house. Both of our vehicles are (and were at the time) paid off in full. We don’t carry any credit card debt. And we’d been house hunting for a year and a half and we wanted the damn house, which is all the reason we need.

A house was for sale, we wanted it, we could afford it (hell, we have enough savings that I could quit working for nearly 4 years and still make every house payment, every property tax payment, every insurance payment, buy gas and groceries, go out to dinner from time to time, buy new clothes periodically, pay all the utilities, and so on). Why shouldn’t we buy the house just because the greedyass thieves in the mortgage business were writing shitty loans?
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Actually, you apparently couldn’t afford the house, or else you would not have had to borrow money for it.

You are claiming that even with a good credit score and lots of money, you couldn’t get a fixed-rate mortgage. I find that incredibly hard to believe unless you were trying to buy a very expensive house. As someone who bought in the same market as you, we were able to get a 30 year fixed-rate loan at a decent rate with no problems at all. Either you didn’t shop around very much or you wanted to buy something that was far outside your financial means. Trying to claim that “greedyass thieves” weren’t offering decent mortgages is just plain false.

45

[QUOTE=Renob]
Actually, you apparently couldn’t afford the house, or else you would not have had to borrow money for it.
[/QUOTE]
That’s a mighty tight standard you apply there.
I doubt that even 1% of Americans pay for their homes in cash on the barrelhead. Are the rest all being irresponsible?

46

[QUOTE=Squink]
That’s a mighty tight standard you apply there.
I doubt that even 1% of Americans pay for their homes in cash on the barrelhead. Are the rest all being irresponsible?
[/QUOTE]

Please point to where I ever said that. If you read what I said, I was merely correcting Shayna. She made the claim that “A house was for sale, we wanted it, we could afford it…” No, she could not afford it if she had to obtain a mortgage to purchase it. She could afford a down payment and qualify for a mortgage, but she could not afford to buy the house. It isn’t a question of responsibility, it’s merely a question of her perception. She thinks her financial situation entitled her to a certain kind of mortgage. Those offering these mortgages disagreed. I’m just trying to get to the bottom of why she thinks this. It wasn’t hard to get a reasonable fixed-rate mortgage when we recently bought a house. I am curious as to why she had such a hard time.

47

[QUOTE=Renob]
It wasn’t hard to get a reasonable fixed-rate mortgage when we recently bought a house. I am curious as to why she had such a hard time.
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It could be any number variables of difference between your situations, couldn’t it? A husband who has only recently immigrated here. A (hypothetical…I have no clue of her financial status) past bad credit report that hasn’t been updated yet after a full payment of debt. Even in this day and age, religious discrimination (redlining may be dead de jure, but quite alive de facto).

48

[QUOTE=Renob]
She could afford a down payment and qualify for a mortgage, but she could not afford to buy the house.
[/quote]
This depends on what you mean by “afford”. It does not have to mean “have cash on hand to purchase outright”, it can mean “the down payment and mortgage payments are comfortably within my ability to pay”.

I agree with you on this part. I bought my house less than 3 years ago, and had no issues whatsoever getting a 30 year fixed rate mortgage, even with a smaller-than-ideal down payment. I don’t know that I would have gone forward with an ARM, and may have stuck it out in the apartment until I got the loan I wanted.

This is where Shayna did have control, tell the lenders it’s Fixed Rate or nothing, and stick to it. If that means another year renting, then so be it, but nobody actually forced her to take an ARM.

49

[QUOTE=Renob]
Please point to where I ever said that. If you read what I said, I was merely correcting Shayna. She made the claim that “A house was for sale, we wanted it, we could afford it…” No, she could not afford it if she had to obtain a mortgage to purchase it. She could afford a down payment and qualify for a mortgage, but she could not afford to buy the house. It isn’t a question of responsibility, it’s merely a question of her perception. She thinks her financial situation entitled her to a certain kind of mortgage. Those offering these mortgages disagreed. I’m just trying to get to the bottom of why she thinks this. It wasn’t hard to get a reasonable fixed-rate mortgage when we recently bought a house. I am curious as to why she had such a hard time.
[/QUOTE]

This is one explanation. I find it unconvicing.

I can’t speak for Shayna’s situation, but I can say this: mortgage brokers were heavily incented to offer exotic and structured products to clients regardless of their qualifications because these products were in extremely high demand on the secondary market. Brokers didn’t want to deal in traditional 30-year fixed products because they would hardly make any money, especially for a jumbo mortgage in a high-growth area of the country. My guess is that Shayna didn’t get the mortgage she wanted not because she didn’t qualify but because a broker in CA didn’t want to waste time doing the paperwork for a loan that wasn’t going to net him any money, especially when he could be spending the time upselling a wacky ARM on some other sap buying a $1M shack and making a robust commission.

And thank you, jayjay, you’re the best. :slight_smile:

50

[QUOTE=Maeglin]
My guess is that Shayna didn’t get the mortgage she wanted not because she didn’t qualify but because a broker in CA didn’t want to waste time doing the paperwork for a loan that wasn’t going to net him any money, especially when he could be spending the time upselling a wacky ARM on some other sap buying a $1M shack and making a robust commission.
[/QUOTE]

I’m sorry, but that’s ridiculous. By that logic, then, no one would have gotten a fixed-rate mortgage. There are a variety of lenders that offer a variety of products. Perhaps one or two lenders would have pushed an ARM on her, but why no lender offered her a fixed-rate indicates that there is much more to her story than she is saying. We went to a few different lenders to shop around for loans. Not one of them tried to push an ARM on us. They presented it as an option but we told them we wanted a fixed-rate loan and no one showed us the door. I find it very hard to believe that my wife and I are somehow the two of the luckiest borrowers in America during the past few years because we were able to find sucker lenders who offered us a fixed-rate mortgage.

To claim that no broker in California was willing to offer a person with a lot of money and good credit a fixed-rate mortgage is ridiculous.

51

[QUOTE=Renob]
I’m sorry, but that’s ridiculous. By that logic, then, no one would have gotten a fixed-rate mortgage. There are a variety of lenders that offer a variety of products. Perhaps one or two lenders would have pushed an ARM on her, but why no lender offered her a fixed-rate indicates that there is much more to her story than she is saying. We went to a few different lenders to shop around for loans. Not one of them tried to push an ARM on us. They presented it as an option but we told them we wanted a fixed-rate loan and no one showed us the door. I find it very hard to believe that my wife and I are somehow the two of the luckiest borrowers in America during the past few years because we were able to find sucker lenders who offered us a fixed-rate mortgage.

To claim that no broker in California was willing to offer a person with a lot of money and good credit a fixed-rate mortgage is ridiculous.
[/QUOTE]

I don’t know what kind of due diligence Shayna performed, how many brokers or lenders she contacted, or what her exact situation was. Like I said. I observed what she said about herself, looked at her location info, and speculated based on things I know, like the insane volume of loans and properties sold in her area.

I own a co-op in NYC. I had no trouble getting a 30-year fixed because most co-ops are allergic to structured products and lenders know this. If they want to play in the co-op space, they need to originate the loans that get their buyers board approval.

52

[QUOTE=unconventional]
Based on what I have read about the Fed’s action to prevent the liquidation of Bear Stearns, it seems to be a necessary but desperate move that signals a much deeper problem than many realize about the stability of the U.S. financial market.
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Obviously, Bears Stearns has liquidity issues, but other banks are pretty strong given the current situation. It all depends on how much of the house these banks bet on the CDOs. Two banks in my portfolio (JPM and Citibank) shouldn’t have this problem. Part of the overarching problem is that the bank managers saw huge profits in these CDOs and to make their books stronger they heavily invested in them. Now, some percentage of the CDOs are not going to pay off, and the last one holding the bag will get hit the most. A bank that is properly diversified may or may not have this problem, but if it does encounter bad loans, it won’t be that bad (if diversified). For an example of a bank that did the exact opposite, and put too many eggs in one basket, see Merrill Lynch.

The Fed doesn’t operate with the same sort of financial ratios that large corporations deal with. For all intents and purposes, the Fed has unlimited funds and cannot go bankrupt (the meaning that you or I, or corporate entities would file for bankruptcy.) The Fed will just go on printing more money causing inflation. Inflation with a weakening economy is a recipe for stagflation and depression. Investors flee taking with them much needed capital, the Fed keeps printing more money causing prices to rise, etc. Then, the world goes into a major economic depression. The faster this happens to the American economy, the worse it will be for the rest of the world. If this happens over time, then the world economy can better diversify itself (but, imo, it’s doubtful that the rest of the world can learn another standard to use other than the $ standard) and lessen the economic damage of a failed American economy.

No, such goals are something attainable if society chooses to do so. In the current situation, the Fed will have to eventually raise interest rates to attract investors, consumers must pay down their credit cards and save money, and people in general have to be more willing to invest in this market. In my not-so-expert opinion (I’m an attorney by trade even though I do have a degree in economics), universal health care in the long run is not sustainable, if investors have a free (or rather, ‘freer’) market to invest in. It basically boils down to the old “guns vs. butter” argument made on the first day of econ. Society will ultimately have to choose what they want with their pocket book. Today’s current set of choices doesn’t bode well for a long term, sustainable model of universal health care.

I’m on the side of not bailing out anybody. This includes homeowners, mortgage brokers, banks, lenders, home construction, etc. Let their lesson be a lesson to be learned by all. If there is going to be any relief, let it come in the form of relief from taxes (and not a ‘tax stimulus’ (or whatever it is Bush is calling it), though, I am eagerly awaiting my tax refund). Business are going to take a punch to balls, but at least it will be short. Let businesses be flexible and let the market decide the best course of action for recovery.

53

[QUOTE=Renob]

It wasn’t hard to get a reasonable fixed-rate mortgage when we recently bought a house.
[/QUOTE]
Lucky you. You live in Maryland, I live in Los Angeles County in California. I highly doubt you can compare the two exactly equally.
[QUOTE=jayjay]

It could be any number variables of difference between your situations, couldn’t it? A husband who has only recently immigrated here. A (hypothetical…I have no clue of her financial status) past bad credit report that hasn’t been updated yet after a full payment of debt. Even in this day and age, religious discrimination (redlining may be dead de jure, but quite alive de facto).
[/QUOTE]
In fact, my husband was indeed a recent immigrant with a relatively short employment history (3 years) in the States. As I said, our credit was excellent.
[QUOTE=Cheesesteak]

I bought my house less than 3 years ago, and had no issues whatsoever getting a 30 year fixed rate mortgage, even with a smaller-than-ideal down payment. I don’t know that I would have gone forward with an ARM, and may have stuck it out in the apartment until I got the loan I wanted.

This is where Shayna did have control, tell the lenders it’s Fixed Rate or nothing, and stick to it. If that means another year renting, then so be it, but nobody actually forced her to take an ARM.
[/QUOTE]
The ARM was on our 2nd mortgage, so it was relatively unpainful, given how much smaller the payment on that portion of the loan was. And we always paid additional principal on that loan every month, as well.

And if I could’ve stayed in our apartment one more minute, I might have considered it. But we had a new slumlord who allowed our apartment to become infested with rats and slugs and we were camping out in a hotel because it was literally uninhabitable. Could we have found another new apartment to rent? Sure, but I wasn’t interested in signing another year’s lease somewhere new, having to move twice, not being able to buy for a full year because I was tied to a lease, and I wanted this house. Since I could comfortably afford the payments, I don’t see why I should’ve had to wait just because someone else might not approve of the loan terms I ended up having to take in order to get it.
[QUOTE=Maeglin]

I can’t speak for Shayna’s situation, but I can say this: mortgage brokers were heavily incented to offer exotic and structured products to clients regardless of their qualifications because these products were in extremely high demand on the secondary market. Brokers didn’t want to deal in traditional 30-year fixed products because they would hardly make any money, especially for a jumbo mortgage in a high-growth area of the country. My guess is that Shayna didn’t get the mortgage she wanted not because she didn’t qualify but because a broker in CA didn’t want to waste time doing the paperwork for a loan that wasn’t going to net him any money, especially when he could be spending the time upselling a wacky ARM on some other sap buying a $1M shack and making a robust commission.
[/QUOTE]
Bingo. And it barely took them 3 months to sell that loan to someone else.
[QUOTE=Renob]

To claim that no broker in California was willing to offer a person with a lot of money and good credit a fixed-rate mortgage is ridiculous.
[/QUOTE]
But true. At least the ones we spoke with. <shrug> Feel free not to believe me, it’s no sweat off of my back.

54

[QUOTE=Shayna]
<shrug> Feel free not to believe me, it’s no sweat off of my back.
[/QUOTE]

Since you are using your experience to claim that responsible borrowers cannot get good loan terms, contrary to both the personal experience of many on this board and many in the real world, then I’d think you’d have a lot invested in making people believe you.

55

Oh, I should add, as well, something I almost forgot about; these were not the original terms of the loan that we were quoted and that we agreed to. They were sprung on us the day before closing, after we’d already put down a non-refundable $20,000 deposit and had no time to start shopping around for yet another lender!

And they hit us with another shock when we walked into escrow and found out they’d grossly under-represented our closing costs, and needed to call all over town to find my boss to loan us an additional $7000, after negotiating with every other person who had a fee on there to lower their fees to help us out. Of course the greedy, thieving mortgage broker wouldn’t reduce his fees or points by a dime. Too bad for us that he sent us in there with a “Good Faith Estimate of Closing Costs” that outlined $10,000 when in reality they were $20,000. There was nothing “Good Faith” about it.

Liars and thieves ripped us off and it’s our fault for not wanting to lose a house we loved and live in a rat infested hell hole. Give me a break.

56

[QUOTE=Renob]

Since you are using your experience to claim that responsible borrowers cannot get good loan terms
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No I’m not. I’m relating my personal experience. Buy it or not, I don’t care.

57

It sounds like you made a pretty awful choice for your lender, Shayna, but don’t somehow think that your possibly criminal lender is representative of most of the industry.

58

[QUOTE=Renob]
It sounds like you made a pretty awful choice for your lender, Shayna, but don’t somehow think that your possibly criminal lender is representative of most of the industry.
[/QUOTE]
I had to load a friend $1000 in a hurry to help him cover his steath closing costs (which were, iirc, around $7000 total). And that friend wasn’t Shayna. So there’s another anecdote (so that you may now quite correctly say that the plural of them isn’t ‘data’).

I totally blame my friend, for is awful choice in forgetting to ask his lender if they were a scuzzball liar crook first. One simple question and he could have avoided all his trouble.

59

[QUOTE=begbert2]
I had to load a friend $1000 in a hurry to help him cover his steath closing costs (which were, iirc, around $7000 total). And that friend wasn’t Shayna. So there’s another anecdote (so that you may now quite correctly say that the plural of them isn’t ‘data’).

I totally blame my friend, for is awful choice in forgetting to ask his lender if they were a scuzzball liar crook first. One simple question and he could have avoided all his trouble.
[/QUOTE]

It’s the responsibility of the borrowerer to do his due dilligence to make sure he’s borrowing from a responsible company. It sucks if you get taken by crooks, but I have a hard time believing that the current crisis is due to situations like Shayna’s or your friend’s. If I’m wrong, someone please let me know.

60

[QUOTE=Renob]
It’s the responsibility of the borrowerer to do his due dilligence to make sure he’s borrowing from a responsible company. It sucks if you get taken by crooks, but I have a hard time believing that the current crisis is due to situations like Shayna’s or your friend’s. If I’m wrong, someone please let me know.
[/QUOTE]

I don’t think anyone is really saying that. At least I’m not. What I am saying is that because of the way incentives were aligned, a situation was created that practically begged for this to happen. The deals were too good to be true for pretty much everyone, so no one did enough due diligence.